The Wall Street Journal reports that Michael Corbat, the CEO of Citigroup, has a singular focus--ensuring that his bank passes its next stress test. The bank's failure of its most recent stress test last spring was an unwelcome surprise. The Journal reports that its failure was rooted in the qualitative portion of the test. Mr. Corbat is thus focusing on "courting the Fed" with visits; "passing next year's stress test [is] his 'Mission No. 1.'" How sad that a bank manager's overriding objective is to cozy up to his regulators so that they give him their blessing. Doing so might not even keep the bank safe. What if the regulators' focus is misplaced? As much as we want to believe that regulators are omniscient and unbiased decision-makers, they have limited information and sometimes miss things or exercise imperfect judgment. The Fed made supervisory missteps with respect to entities like Citi in the lead-up to the last crisis, and that is not surprising. Regulators simply are not able to collect and process information as quickly and effectively as necessary to be outside risk managers for the big banks. Moreover, as John Cochrane observed in a recent article, "[a] system more ripe for capture and a revolving door would be hard to design." Our regulatory system should be designed to encourage bankers to pay close attention to the challenges and opportunities faced by their institutions, not to keep their eyes fixed on every move their regulators make. Bank executives with their heads in the regulatory clouds are likely to miss important happenings on the ground.

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The Wall Street Journal reports that the Financial Industry Regulatory Authority is reviewing its penalty guidelines to make sure they are appropriately severe. This review follows a speech by Securities and Exchange Commission member Kara Stein, in which she opined that FINRA penalties are "too often financially insignificant for the wrongdoers" and urged FINRA to make penalties high enough to be "impactful, and provide strong motivation for compliance." It is good that someone at the SEC is paying attention to FINRA, but a blanket suggestion to raise penalties may serve only to exacerbate problems that arise from FINRA's inadequate accountability structure.

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Last week, payday lenders sued the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Board of Governors of the Federal Reserve System for allegedly dissuading banks from doing business with payday lenders. Plaintiffs argue that the bank regulators' efforts are part of the now infamous "Operation Choke Point," the Department of Justice's program to prevent fraudsters from gaining access to the banking system. Bank regulators, through these Choke Point initiatives, have effectively changed the regulatory landscape for banks and legitimate businesses without affording these entities an opportunity to weigh in.

The payday lenders contend that the banking regulators, urging banks to be mindful of reputation risk, have forced banks to sever their relationships with payday lenders. Rather than using notice-and-comment rulemaking, bank regulators have used informal methods to spur action, such as guidance documents and suggestions by bank examiners. Using guidance documents and other informal means to influence bank behavior, plaintiffs argue, runs afoul of the Administrative Procedure Act, because they are de facto mandates on banks that are implemented without public input. FDIC guidance, for example, identifies as higher-risk activities payday lending, magazine subscriptions, and pharmaceutical sales. Although these regulatory directives are about keeping banks away from bad actors, banks would rather cut ties with a legitimate customer than risk attention from their regulators. As the Department of Justice explained in a September 9, 2013 memo, it is up to legitimate businesses "through their own dealings with banks, [to] present sufficient information to the banks to convince them that their business model and lending operations are wholly legitimate." Such information campaigns likely will go unheeded by bankers following the not-so-subtle hints they are getting from their regulators.

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Yesterday's decision in SEC v. Citigroup weakens the much needed judicial check on the Securities and Exchange Commission's enforcement program. The U.S. Court of Appeals for the Second Circuit told District Court Judge Jed Rakoff to stop being so skeptical when the SEC presents him with settled enforcement actions.

Monday's Supreme Court decision in Bond v. United States, which we earlier profiled here, involved a case raising fundamental constitutional questions of federalism and separation of powers. Rather than grappling with these questions, the Court majority ruled on statutory grounds.

Case background
Carol Anne Bond, a Pennsylvania microbiologist, attempted to poison her husband after learning that he had impregnated her best friend. She was convicted of violating a U.S. federal statute enacted to implement the Convention on Chemical Weapons, a 1997 treaty intended to prevent the proliferation of chemical weapons. On appeal, Bond's lawyers argued that the law did not apply to Bond's conduct and second that even if it applied it was unconstitutional.

Key to Bond's constitutional claim was whether a treaty signed by the president and ratified by the Senate can expand Congress's legislative powers beyond those otherwise enumerated in the Constitution. A 1920 Court decision authored by Justice Holmes, Missouri v. Holland, had held that for a valid treaty "there can be no dispute about the validity of the statute under Article I, § 8, as a necessary and proper means to execute the powers of the Government" -- without further analysis or authority. A subsequent Court decision, Reid v. Covert, limited this holding such that a treaty obligation could not empower Congress to violate the Bill of Rights. More recent scholarship by Georgetown law professor Nicholas Quinn Rosenkranz has challenged Missouri v. Holland's holding in light of the constitution's text, history, and structure.

Decision
While the Supreme Court unanimously overturned Bond's conviction, Chief Justice Roberts's majority opinion, on behalf of six justices, avoided the constitutional question. Roberts reasoned that the Chemical Weapons Convention was not intended to cover minor, local poisoning incidents and determined that Congress could not have intended such a construction of the convention's implementing statute, which would upset the constitutional balance of power between Congress and the states. Roberts thus construed the law narrowly and concluded that the law could not apply to Bond's crime.

Justices Scalia, Thomas, and Alito each filed separate concurring opinions arguing that the case had to be decided on constitutional rather than statutory grounds. In their view the statute on its face clearly applied to any attempted use of a "toxic chemical" not used for a "peaceful purpose related to an industrial, agricultural, research, medical, or pharmaceutical activity." Justice Scalia's concurrence, joined by Justice Thomas, was particularly specific in its inquiry into the limits of the power given to the President and Senate to "make" treaties -- following significantly the line of argument of Professor Rosenkranz's article -- and called for Missouri v. Holland to be overturned.

AnalysisAt Volokh, Jonathan Adler suggests that the concurring opinions may signal some discontent on the part of the more conservative justices with the Chief Justice's tendency to embrace strained statutory readings to avoid constitutional questions (the so-called doctrine of "constitutional avoidance"). His co-conspirator Ilya Somin reads the tea leaves and suggests that in a future case where the treaty issue is more explicit, the Court may be disposed to overturn Missouri v. Holland and limit the ability of a treaty to expand Congressional legislative authority, and offers further thoughts on the justices' various positions.

In its embrace of constitutional avoidance, the Court's decision is obviously reminiscent of the Chief Justice's lone opinion in NFIB v. Sebelius, in which he construed the individual mandate of the PPACA (Obamacare) to be an exercise of Congress's taxing power rather than its Commerce Clause power to uphold the law's core provision (though in that opinion, the Chief did observe that the mandate was clearly a penalty, and only reached the "tax" construction as an alternative functional ruling through which Congress could have reached the same end). The Bond decision also brings to mind Justice Ginsburg's opinion in Skilling v. U.S., which effectively rewrote the "honest services fraud" statute (construing the law's vague provision to apply only to bribes and kickbacks) to avoid deciding whether it was unconstitutionally vague.

The Bond and Skilling decisions may signal how the Court will rule in the upcoming Yates v. United States. Yates involves the prosecution of a commercial fisherman accused of violating the Sarbanes-Oxley financial reform law's prohibition on destroying, manipulating, or concealing any "record, document or tangible object" to hinder federal investigations -- in the context of throwing back fish that may have been smaller than the minimum size allowed by regulations. While a fish is certainly a "tangible object," the Sarbanes-Oxley law, passed in the wake of the Enron-era corporate scandals, was clearly contemplating document-shredding and similar destruction of corporate records such as that conducted by Enron's auditor, Arthur Andersen. It will be interesting to watch whether the justices in the Bond majority will continue the trend of narrowing criminal statutes beyond their clear terms when the government is applying a broad statutory provision in the criminal-law context.